Pierre Andurand Says the World Could Run Out of Cocoa Inventories

Joe Wiesenthal
As a real estate manager. Principal Asset Management harnesses the power of a 360 degree perspective, delivering local insights and global expertise across public and private equity and debt. Their teams apply local insights and global perspectives to help identify the most compelling investing opportunities. Principal asset management actively invested learn more@principalam.com dot investing involves risk, including possible loss of principal. Principal Asset Management SM is a trade name of Principal Global Investors, LLC.

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Joe Wiesenthal
And I'm Joe Wiesenthal. Jo, can I tell you something? It's slightly embarrassing. This could be of many things that, but yes, go on. Okay, so I had a self realization the other day.

Tracy Alloway
I think I might have prepper tendencies. I'm not. I didn't know that. But that doesn't totally surprise. Like, it sort of fits.

Joe Wiesenthal
I couldn't. You're like, yes, you're paranoid. This makes total sense. I kind of get that. So the reason I had this realization, we recorded an episode recently on the big surge in cocoa prices.

Yes. And a few days after that episode came out, I was like, hmm, I should buy some chocolate just in case. So I went on Amazon and I bought like an industrial size package of milka chocolate. And I was like, I'll just keep it in the pantry. It'll be really convenient.

Tracy Alloway
It'll be there for emergencies. I'm sure I won't eat it at like 10:00 p.m. When I'm craving something sweet. I'll just keep it there for a long time. And so I ordered it.

And then you know what happened? Tell me the rest. Okay. So the first thing that happened was I never got the chocolate, which is kind of weird for Amazon. Like, they just never fulfilled the order.

And the supplier was like, oops, we don't have enough chocolate, I guess. But then secondly, as soon as I did it, prices of cocoa started falling. This was the market saving you from a bad trade, basically. So you put in an order right at the top. You know, sometimes you need a little luck in life.

Joe Wiesenthal
And now you can buy the dip. That's right. I was fully refunded at the top of the market and now I can buy when it's slightly more reasonable. But I have to say I'm looking at the chart of Coco futures right now. So they surged above 11,000 and then they came back down.

Tracy Alloway
Let's see, we're about 8000. Yeah, right now. So it's been something of a roller coaster ride. And the thing that I don't really understand is when I look at coverage of the cocoa market at the moment, there seems to be consensus that supply is going to be an issue. So I know Bloomberg published a survey of traders where basically everyone was saying that they think prices are going to go higher.

We could see over $15,000 later this year, but in the meantime, prices are sliding. So there seems to be a disconnect there. Totally. Well, look, I mean, even if the fundamentals are say, okay, this market is in deficit or all these growing conditions, like at some point is, they say trees don't grow to the moon or trees don't grow to the sky, whatever it is. So at some point you can have solid bullish fundamentals.

Joe Wiesenthal
And the price, I mean, it really is crazy because last in December we were looking at 4000. So we're still double so far this year. Yeah. Well, I have to say we do in fact have the perfect guest. We're going to be speaking to someone who timed the big cocoa trade a lot better than I did personally in my pantry.

Tracy Alloway
But we're going to be speaking with Pierre Andurand. He is of course the founder of Onderand Capital Management. We're going to talk cocoa and a bunch of other commodities. So, Pierre, thank you so much for coming back on all thoughts. Hi.

Pierre Andurand
Thanks very much. My pleasure. So maybe to begin with, talk to us about how you got interested in coco, because my understanding is you put a big trade on a long position earlier this year. It paid off massively. But this isn't a sort of normal type of trade for you.

Tracy Alloway
This is something that was a little bit different. Yes. Well, generally my background is more in energy trading, but I've traded quite a bit of metals as well, a little bit of agricultural products. But I have one analyst who is very good and who told me in January, Pierre, you should look at Coco. So I'm like, okay, I don't know anything about it.

Pierre Andurand
Tell me about. And it gave me a really good presentation that was really interesting. So then we really digged in really deep together to really understand the fundamentals of the market. And basically we have a massive supply shortage this year. I mean, we see production down 17% relative to last year.

Most analysts out there have it down 11%, but that's because they tend to be very conservative. They have lots of clients and they don't want to worry the world. So they come with relatively conservative estimates, but really tracking the export from the main exporters, mainly Ivory coast and Ghana, that we present together about 60% of world's production. We see basically ivory coast exports down 30% to date and Ghana down 41%. So just those two countries together since the start of the season, which is the 1 October, are down 800,000 tons.

And now we have what we call the meat crop that is starting, but that represents only 20% of the balance of the season for West Africa. That's not going to be enough to really change the deficit that we have this year. We have a deficit of 800,000 tons from those two countries. And then looking at all the other countries we have, I think some are slightly positive, some are slightly negative, but basically we get to a deficit of 800,000 tons this year. Thats the first time we have such a decline in supply and thats very hard to make it fit.

So at first you eat into current inventories until you run out of inventories, and then the price can go anywhere. So when we look at, okay, what makes the price of cocoa, its always about supply versus demand. But what has been capping the price between $2,500 a ton and $3,000 a ton, it was not demand because demand is extremely inelastic. I mean, you can study that historically when you have a recession or not, when prices go up a lot or not. I mean, demand generally goes up.

And that's because the amount of in dollar terms that people consume in cocoa is very small. I mean, I did a back of the envelope calculations the other day. I mean at basically $10,000 a ton, even though it's four times the more recent historical prices, out of a market of 5 million tons of demand per year, you have like 8 billion people on the planet. So in average, it means that people consume 1.7 grams of cocoa per day, which at $10,000 a ton represents 1.7 cents per day. Okay, that's the average person.

Many people eat nothing and a few eat ten times that amount. Like Tracy, I was going to say, I can personally attest that my chocolate demand is very inelastic. But yeah, but you know, let's say if you eat even one full tablet, right, so 125 grams a day every single day for the whole year. Which is quite a lot, right, of a high, high content of real cocoa. Because you know, your milk and milk chocolate, you have like less than 10% cocoa in it.

So the price can go up ten times. Your tablet is only going to double in price. It's not going to react very much to the cocoa price. But if you take a high content, high chocolate content, like a tablet, 125 grams, that means that you probably have maximum of 50 grams of cocoa beans equivalent in it. That means probably a lot less.

Then you get to an expense of $14 per month at current prices, which is an increase of $10 per month relative to when we had a more normal price. So it means that demand, like for more reasonable chocolate lovers, that increase in price in cocoa just corresponds to two to $5 per month. So people are not going to eat less chocolate because of that. So it means that prices really are capped by the amount of supply you get. So if you can't get enough supply, the price can go up a lot until we get more supply.

And when do we get more supply? Well, that in part due to the weather. If you have much better weather, then you might get more supply of cocoa beans next year. But we have some issues that are also structural. So when we look at the reasons for this large decline in production this year, I mean, a lot of the reasons are actually structural.

I mean, we can look at four reasons why cocoa beet production has gone down a lot this year. I mean, first, I should give like a little bit of background of why cocoa is so concentrated in West Africa. I mean, it's mainly because it requires very specific temperature, rainfall and humidity conditions. And that's why most of the production is concentrated around a certain latitude. So 70% in West Africa and then you have 21% in many Latin America and 5% in Asia and Oceania.

So the main reasons why we lost a lot of production this year is, number one, weather. So some of it due to El Nino, we had basically period of time when it was too hot and period of time when we had way too much rain. Second is climate change. So climate change is every year shifting the weather patterns, generally unfavorably. For cocoa productions.

Then you have two diseases. You have one called the black pot disease that comes from a fungus, and it occurs mainly during the rainy season. It's spread by rain splash, so it can't grow when it's dry. Then you have a virus called the swollen shoot disease. It's not a new disease.

It was discovered in 1936. It's transmitted by millibugs but it decreases cocoa yields a lot. So basically, a tree that has that swollen shoot disease loses 25% yield within the first year and 50% within two years, and the tree dies within three to four years. And we've had actually a spread of that disease, like, over the last year. And then also we had less usage of fertilizers, mainly in ivory coast, due to high fertilizer prices and also shortages due to the russian invasion of Ukraine.

So everything is linked. So some of it might be solved if we get better weather. I mean, for next year, we should have La Nina and not El Nino, so that should help at the margin. But we still have issues with climate change. We still have issues with black pot disease and swollen shoot disease.

And there's no indication that we get more usage of fertilizers in Ivory coast because actually the farmers are still getting relatively low prices and they're still struggling to make ends meet. So a lot of those supply issues are actually structural. This was already a really fascinating answer. In particular, just that point about how if a commodity just does not take up much wallet share, then yes, it can go up, but you don't get that same sort of demand destruction as if it were really creating a big financial burden on the end consumers. Something I'm curious about with Coco is when I think of oil, we are just like, we're swimming in data about oil.

Joe Wiesenthal
There are multiple big, well funded international statistical agencies that track it. You can get inventory data easily. There's OPEC, et cetera, with Coco. And I'm curious, you said your analysts brought it to your attention in January. In my mind, I imagine that there is less robust information and it's more scattered, et cetera.

Maybe I'm wrong, but does that present more opportunities to identify moments where there's something going on in the market and traders and analysts aren't seeing it? We managed to get enough relevant data, actually, to understand what's happening. You have some consultants that are specialized, and every month they have a team doing surveys of the main producing regions to understand, and then they work on their forecast on how much they think production will grow. So actually you have some specialists. So actually we get enough data to understand how.

So what did your analyst see? Or how was your analyst able to see something in the supply and demand situation that he felt and you felt was not being identified by the analysts who cover this closely? I think it's mainly an understanding of how much prices have to move to balance the market. Sometimes people can trade that market for 20 years. They've been used to a range of prices and they believe, okay, the top of the range is a high price for an apple.

Pierre Andurand
But they don't really ask themselves what makes that price. And sometimes taking a step back can help. What makes the price is mainly the fact that in the past you would have supply response if prices were going up. But if now you don't get the supply response or the supply response takes four or five years, then you need to have a demand response. And a lot of people look at prices in nominal terms.

So you hear people saying, oh, we're at all time high prices in coco. But that's because they look at prices in nominal terms. Previous high in 1977 was 5500 something dollars a ton of 1970, $7, which is equivalent to $28,000 a ton of today's dollar. So we are still very far from previous highs. And so you have to look at a bit more history and understand in the past how prices reacted to a shortage, how long it took to recover for that shortage to actually solve itself and what's different today.

So there's a ratio that we look at that most people look at. It's actually the inventory to grinding, the ratio. So it's a measure of inventory to demand. What we call grinding is basically industrial companies that take the cocoa beans and they want to make chocolate with it. So it's a process.

And some of them make the end product chocolate directly. Some of them sell back the product to other chocolate makers. And so basically a typical grinder would take cocoa beans and make cocoa butter and powder with it. And the prices of both those elements also went up even more than cocoa beans, which means that actually we probably had some destocking everywhere on the, in the chain. So it looks like demand.

When we look at the chocolate makers, the end demand for chocolate didn't go down at all. It looks to be flat on the year. Grindings look to be down 3.5% this year, despite the fact that the end demand is the same in volume, which means that they've been destocking cocoa beans actually. And so we had destocking everywhere at the end chocolate level, at the cocoa beans, at the cocoa butter and cocoa powder level. So we had destocking everywhere on the chain.

And now we have the largest deficit ever on top of two previous years of deficit. And it looks like next year we will have a deficit. So we're in a situation where we might actually run out of inventories completely. I mean, this year we think we will end up with an inventory to grinding ratio. So inventory at the end of the season of 21%.

For the last ten years we've been between 35 and 40% roughly. At the previous peak in 1977 we were at 19%. And that's what drove us to $28,000, a ton of today's dollars. If we have another deficit next year, then we might go down to 13%. So I don't think it's actually possible.

That's when you really have real shortage of cocoa beans. You can't get it and that's when the price can really explode. And so understanding that you have to slow down demand and we know that demand can't really be slowed. So that's when you can have an explosion. And remember that this commodity futures you need to have, they're actually physically settled, right?

So if somebody wants to take delivery, they have to converge with the price of the physical. If you have no physical, somebody wants to take delivery, the price can't go anywhere. So it's a dangerous commodity to short, right, if you have no, no physical against it. And actually you know sometimes we read news that the phones have been pushing cocoa prices is actually completely untrue because the phones have been selling since February. They actually went from a length of 175,000 lots.

So that's 1.75 million tons of cocoa lands. I think it was around like September last year in average, or a bit earlier, to 28,000 lots to 280,000 tons. Yeah, at the moment. So they sold more than 80% of their lands actually. And the people who've been buying futures from the funds, it's producers because they're producing a lot less than they expected.

So what has been happening in the cocoa market is that you had a reduction of what we call the open interest where both the longs reduce their lands and the shorts reduce their shorts. And then we get into a market where you have less liquidity because you have less exposure, you have less longs and less shorts, and then the volatility increases. So in the past when people were comfortable being, let's say, having a 100 loss position, now because it moved more than ten times more than in the past, we're going to have like a ten loss position, right? So the market became more due to the fact that we had a massive move and we have a massive deficit. So everybody reducing their positions and because of the increased volatility we have less activity.

And that's what makes the price more volatile as well.

As a leading real estate manager, principal asset management harnesses the power of a 360 degree perspective, delivering local insights and global expertise across public and private equity and debt. Our experienced teams are uniquely positioned to uncover compelling opportunities in today's market, giving our clients an exclusive advantage. Principal asset management actively invested. Learn more@principalam.com Dot investing involves risk, including possible loss of principal. Principal Asset Management SM is a trade name of Principal Global Investors, LLC.

Collaborate for a greener future at the Bloomberg Green Festival, a groundbreaking celebration of the thinkers and innovators leading the way from design and culture to technology, science and entertainment. Hear from inspirational speakers and immerse yourself in climate solutions, July 10 13th in Seattle. Title sponsor Amazon Official Airline Alaska Airlines get 20% off using promo code Radio 20 at bloomberglive.com greenfestival. This is something I find fascinating. So the way the financial markets sort of interact with the underlying real commodity and how that ends up influencing price, given the dynamics that you just laid out, where because of, you know, structural changes in the market, both in cocoa and then also in the way it's traded, this new volunteer volatility making people maybe less inclined to short and leading to decreased trading volumes.

Tracy Alloway
Are you still long coco in this environment or have you like a lot of other people, backed off at this point? Well, you have to be careful about the sizing of your position because it's something that is clearly less liquid than the commodities I'm used to, which are for example oil or natural gas. It's a lot less liquid. And in a market like that, it's a lot more volatile. It's not always volatile, but when you have a large deficit and low inventories, it moves a lot.

Pierre Andurand
So you have to calibrate your position to be able to take a 50% move against you on the way. That's what you have to do. It doesn't mean that you have to be out completely because I still think that there's more upside than downside. I think we still have the potential to go above $20,000 a ton later this year or next year. Versus on the downside, maybe we go from, if you look at a December contract, it's at roughly $7,000 a ton today.

Maybe we go back down to 5000. You have $2,000 a ton downside versus $13 to $15,000 or maybe more upside. So it's still worth having some lands, you know, in terms of probability. But now, I mean, it could go down. The probability that it goes back down is not zero, but for that you need, a lot of things need to go right.

You need like a bumper crop in West Africa next year. And it means you need to have the perfect weather in West Africa from now to the end of the year in order to have a really good crop for next year. And it might happen, but it might not happen. You need to get extremely lucky for that to happen. So I think the balance of probabilities are still that we will have a deficit next year.

On top of the very large deficit this year. We believe we have 800,000 tons deficit out of 5 million ton market size. Right. So it's a very large deficit. If we have the production going back up roughly 10% from this year to next year, we still have a deficit of 300,000 tons or so next year.

That brings us to 13% stock to grinding ratio, which would be much lower than what we had in 1977. So we still have, I think, a high probability of having much higher cocoa prices. Even if they go there. We might have big drops like we've seen the last month or so, the last two weeks, but we might make new highs and then have big drops again and then make new highs. Or if over the next, for months, we realized that we are going to have, from all the surveys we get every month in Ivory coast and Ghana, that the crop next year will be amazing, then the prices will probably come off from here towards, I don't know, five or $6,000 a ton.

But they're not going to go back down right away to $2,500 a ton because we have very low inventory. So we need to rebuild stocks everywhere. In the supply chain, these inventories. So you've been talking about the stock inventory to grindings ratio or the stocks to grindings ratio within the sort of cocoa or chocolate supply chain. Who are the holders of the stocks and how do you get that?

Joe Wiesenthal
How is that data collected? Basically, you have the exchange. So first you have exchange stocks. So we have weekly data in european exchanges and the US exchanges. So in the US, for example, everything's held on the exchange?

Pierre Andurand
Pretty much. So everything in, in exchange. In Europe, only 20% of the inventories on exchange, 20% of the european stocks are on exchange. The others are really with chocolate makers or that they need to hold stocks directly to make the chocolate. And then you have some also, obviously, at the producing region.

And that's something that we can see. The inventories at the port in Ivory coast and Ghana. So the main exporters, you can actually follow the amount in inventory there. And then the west, what we don't know is inferred statistically. Right.

So there's a bit of noise in what that total amount of inventory would be. But you have some, some firms that are specialized in it that will come up with an estimate of the number. So they'll do some surveys and they'll do some cross validation to make sure that the numbers add up at the end. Out of curiosity and just widening this out to a few other commodities, have you observed any similar dynamics in something like coffee, which has been getting a lot of attention recently, or orange juice? I ran into some guy called Mortimer who was telling me that Brazil is supposed to have a bad harvest this year.

I haven't followed orange juice. I mean we looked at coffee quickly, it looked less, it looked interesting as well because you get big losses in production from Vietnam. But we didn't see from far something that was so exciting, so we didn't try it. Orange juice, we haven't. But I would say that generally the shift in weather patterns due to climate change are going to bring some structural stories into soft commodities.

And so we'll have to look at more and more of those soft commodities because it's not only going to be from one year to another, you're going to have that everything could change due to random change in weather. You have this underlying climate change that is also a trend that really impacts production over time. We have to identify the commodities that will be impacted by that. Talk to us a little bit more about, obviously we've had you on in the past, primarily talk about oil and as you mentioned in the beginning entering, you don't trade ag as much. There's sort of a different specific space for you other than the size of the market.

Joe Wiesenthal
And I guess as you mentioned, it's all physical delivery futures. What are the other dynamics that are different when you go from trading a commodity like oil, which is gigantic and liquid, to a commodity like cocoa? Well, you have to follow the, I mean, cocoa I think is less complicated than the grains because in the grains your weather can impact production so quickly versus for cocoa it does impact production, but it takes five years to, you know, when you plant a cocoa tree for, I mean, three to five years for that cocoa tree to give you cocoa beans, this is for grains, you get it right away. So you get like a slower production response. So it should be, when you have a big supply issue and that you have issues due to climate change, you should have like a larger move than for grains.

Pierre Andurand
So it should make it easier in a way to have positions that you can hold for longer that are a bit more structural than four coins, I would say that's my understanding, at least for now. And there's enough data to, I mean enough data meaning like every week we get a bit more data on how the new crops are doing, mainly in Ivory coast and Ghana, to have a good understanding of what the crop will be, the production will be the following year. So I feel like we have enough data to understand in which direction we're going versus the grains. I feel like the grains can move up and down a lot and it's more complicated. You have to look at a lot of tiny details versus coco, where you have many one mega major producer and another very large one.

Tracy Alloway
Speaking of climate change, can we talk a little bit about copper? Because this is also a commodity where I feel like there was a lot of discussion about it being in structural short supply as the world moves towards electrification. But then over the past couple of years, prices went down, I guess because of concerns over the outlook for economic growth and just relatively recently. So starting sort of February of this year, prices are going up again. What's your thesis when it comes to copper?

Pierre Andurand
I think copper should go up a lot. Lately. We are going from over the last, let's say 1520 years. We were in a market where demand was going about half a million ton a year and supply was going half a million ton a year in average. If you look at long term averages, it was over time a balanced market.

We had times where it was tight times where it was in a bit of a surplus, many during the pandemic or during financial crisis, but overall it was a balanced market. Now, due to the energy transition we're getting, obviously, as we have to electrify the world, we have new demand from electrification of transport. So it means that not only to make the electric vehicles, but also to supply more electricity overall in the world for that energy transition. So you have to work on the grid to have more renewables, and renewables take a lot more copper than like nuclear plants or like fossil fuel generated electricity. So like solar panels and windmills take a lot more copper, and also all the data centers take a lot of copper.

So we have that surge in power demand that we need a lot of copper. And now we're getting into a market where despite the fact that the chinese property market will be much weaker than the last 15 years in terms of growth, and we're seeing decline in the property, in the copper demand in China for the foreseeable future, despite that, we see a market in which we are going to have overall 1 million tons of demand per year, roughly, of demand increase per year and the supply growth directly by the end of next year will be zero to negative. So we think that in terms of mining supply, we are peaking in about a year, like twelve to 18 months, and then we flatten and then we go down. So best case scenario you get like a million tons increase in demand against no increase in supply. So you get a larger and larger deficit every year and the price hasn't reacted yet.

And that's mainly because I think there's not enough funds out there or companies that actually trade the futures market and hold positions for very long. I mean if you look at most of the hedge funds out there, it's a bunch of pods that have many, many teams in those big multi strategy funds that have very tight drawdowns. So they tend to try to trade for the next few days or next week or so. They can't really hold positions for very long and there's not a lot of companies that can hold position. So because the market is not really doing its job to actually give a price signal to solve that deficit, that upcoming deficit, that's a multi year deficit.

Basically it takes to grow supply in copper. I mean if you bring a new mine, it's like more than ten years to bring, it's like ten to 15 years to bring a new mine. And everything has been relatively well explored. So now the supply growth from copper is coming from more and more dangerous countries as well, like less and less stable countries. So you don't get that quick supply response in copper.

But the demand is now and demand is growing. I mean we're going to build that electricity grid and we're going to build all these ev's and also that data center, they're going to be built at whatever the cost of copper. And remember that the price of copper is a very small percentage of the price of the end product. So if copper goes up ten times, I mean, your end product will go up a little bit, it's not going to double in price. So if you need to have a demand response, mainly when the world is kind of obligated to go through that energy transition, then we should get a really, really large price move.

I think there's a long way to go for copper. I'm interested in this because we have seen this bit of a copper rally that we're not even, I don't even think we're quite at the 2021 highs. But it's interesting. I'd love to hear your explain further about the connection between, okay, any, any fool can look at supply and demand and say, there's this much demand for copper out there, there's this much supply coming online. There's going to be a deficit.

Joe Wiesenthal
That seems bullish. How do you take that analysis or take that starting premise and then think about what does a fair price look like? As opposed to just saying, yeah, there's more demand than supply? How do you get to a number that in your view, or in your analyst view, looks like a number that might bring supply and demand into balance? I mean, it's going to be.

Pierre Andurand
I don't think it's just a price. It's like the whole path is important, I think, okay, so we look at it year by year. So we think, okay, at current prices, what would be the supply and demand balance? Do current prices have an impact on demand growth or not? Or what is the state of the global economy?

What kind of demand goals do we expect for copper and what is the supply growth? I mean, supply growth is not going to be too dependent on proper prices for the first few years. I mean, a little bit to scrap, you get a bit more scrap, scrap metals when prices go up. So you can model for that. When prices go up, you get more supply that comes as a source of supply for copper.

And then the demand we look at, okay, what can be price sensitive, what can be pushed to later or not? It's not that much, to be honest. And then we get to a path for the demand. And then we look at, okay, what do we think the supply and demand balance looks like every year? So for Apple this year, at current price set, we think we're going to get about like 400 to 500,000 tons deficit.

And we had less than that in terms of visible stocks at the beginning of the year. So it means that we could actually run out of visible inventories by the end of the year. Now, there is some extra inventories, mainly the strategic reserve, what we call the SRB in China. But if they know that we are at the beginning of a multi year deficit, they are not going to sell their strategic reserves in the first year. So then we look at the following year, we think for next year, we also have half a million ton deficit.

And actually we can't cover that with a level of inventory. So we need. And then assuming we had enough inventories, we go to in 2026 to invent like deficit that are more than a million tons and eventually more than 3 million tons in 2030. And that obviously those deficits accumulate and we don't have enough inventories. To actually go through the first year.

So it means that we are going to have a really large price increase sooner than later to slow demand. And I don't know how much it would have to go up by. Yeah, so basically on copper, what I mean that we are going to have to have a nonlinear move sooner than later because of the large deficit we think we're going to have this year, and if not this year, next year. And we don't have enough inventories to meet that deficit. So we need to slow down demand relatively fast.

And we think that demand is also very inelastic due to the fact that the price of copper as a percentage of the end product is very low and we need to go through the energy transition regardless of the price almost. So I think that's why prices can move a lot for copper. So at the end we don't know exactly how high they can go. Do we go to. I think they could go up four times over five year horizon.

But does it mean that we go up from 10,000 to 15,000 this year and then 22,000 next year? I don't know, but I think that the kind of price moves that I'm expecting like a decent multiple in price, not a 20% increase. A 20% increase doesn't change anything to your supply and demand balance on two to three horizon.

As a leading real estate manager, principal asset management harnesses the power of a 360 degree perspective, delivering local insights and global expertise across public and private equity and debt. Our experienced teams are uniquely positioned to uncover compelling opportunities in today's market, giving our clients an exclusive advantage. Principal asset management actively invested. Learn more@principalam.com Dot investing involves risk, including possible loss of principal. Principal Asset Management SM is a trade name of Principal Global Investors, LLC.

Collaborate for a greener future at the Bloomberg Green Festival, a groundbreaking celebration of the thinkers, doers and innovators, leaders leading the way from design and culture to technology, science and entertainment. Hear from inspirational speakers and immerse yourself in climate solutions July 10 through 13th in Seattle. Title sponsor Amazon official airline Alaska Airlines get 20% off using promo code Radio 20 at bloomberglive.com greenfestival so Joe asked. You how you come up with the price thesis for something like copper and how you see it play out. And you know, we're mostly focusing on time scales there.

Tracy Alloway
But there was one commodity that I wanted to ask you a similar question on, which is oil. And oil, it feels to me, is facing a very uncertain year in many respects. We have the upcoming us presidential election. And it feels like things could go in very different paths depending on whether Trump or Biden get the presidency, not necessarily in terms of us oil production, which is already quite high, and I think has surprised a number of people, including possibly yourself. But maybe in terms of things like the response from OPEC or what happens with Russia, Ukraine, can you walk us through how you, in such an uncertain moment, how you even begin to come up with a short term thesis for the price of oil over the next year or so?

Pierre Andurand
Yeah. So when you look at all the potential supply disruptions that we could have had, at the end, nothing. We didn't get any supply disruption. So if you look at, in 2022, 2023, we're all expecting to see at least some decline in russian production due to sanctions or due to issues in Russia. And at the end, there was no supply response at all.

I mean, there was no supply disruption. Last year. In 2023, we got a surge in iranian exports due to the fact that the sanctions on Iran were not really enforced, I would say. So we had. Relative to expectations, we ended up having a lot more russian production and iranian production.

And also last year, us supply grew up more than expected since the beginning of the year. So for the last four months, four, five months, four months, I would say us production has been disappointing. So has been a bit lower than people expected, and that the first time in a long time, obviously, four months is not enough to grow a trend, but it's something to watch out for. I mean, is us shell production about to peak or not? We don't know.

We only know it after the fact. But so far, it looks like us production is actually not going too much. I mean, at least over the last four months, with the tensions in the Middle east, in terms of what scenario we could have to really lose supply, I would say it's only if we get an attack on iranian oil facilities, but I don't think the US would want that. So I don't think Israel would do it, because if they were to do it, then the Iranians would probably try to blow up the saudi facilities or close the Strait of Hormuz, and then we get into really huge supply disruption. But it's a low probability event, right?

It's very unlikely, but it's not impossible. But if the conflict stays between Israel and Gaza, I mean, there's no oil there. It has no impact at all on oil supply. So where we could have supply disruptions is coming from the ukrainian attacks on russian oil infrastructure. And when you look at what they've been doing for the last six months.

They have many attacked russian refineries. And that's really to try to hurt the war effort in Russia, in a sense, not actually with it so much financially. It's more for them to not have the right amount of fuel to make enough rockets and all that, and for the russian people to feel like they're also. There's something going on, and it's not just in a faraway land. But the Ukrainians have not attacked pipelines and ports yet.

I think if they really wanted to impact the revenues of Russia, they should attack the ports and the pipelines bringing crude oil to the ports and keep on blowing up pipelines. And then that would really have a big impact in the revenues that Russia would get. But that would also have an impact on oil prices. And the US don't want to have million in an election year. They don't want to have the Biden administration.

Inflation is very, very paranoid about having high gasoline prices before the election. So they're putting pressure on the Ukrainians to not attack. To not attack ports. But if we get into a situation where the Ukrainians become more desperate and need more help, then they might attack ports. So that's where we could potentially have supply disruptions.

In terms of. Yeah, sorry, I just, real quickly, how much do you think that pressure from the admin not to attack oil infrastructure is hampering the war effort for Ukraine? Well, at the end of the day, if they had no help from the US, they would attack the old facilities in Russia. But the fact that they're dependent on us weapons, obviously they have to listen to what the US say. I mean, as far as they're helping, if the US stop helping, then of course they will go for the old facilities, I think.

And in terms of the elections, you were asking, like, Trump versus Biden, does he change anything for oil? I mean, I think it's quite marginal or nothing, I would say, for us supply, because despite all the talks, us production surged under Biden. So I don't think that Trump would make it surge more. I mean, it's just a question of geology and money, actually, more than anything. I think we can't be too far from peak in us production.

So I don't think the US supply growth has a potential of many millions of barrels a day extra. So I think. I think it's quite marginal for us production. But where there could be a bit of an impact for oil would be, I would expect Trump to enforce the sanctions on Iran more tightly. So we might lose some oil from Iran under Trump, but again, that we probably get a bit more oil from the Saudis.

So I'm not sure. I don't think. I don't think Trump versus Biden have a big impact on oil prices. All right, well, Pierre, we're gonna leave it there. Thank you so much for coming back on odd lots and walking us through all these various soft commodities and oil as well.

Tracy Alloway
Really appreciate you coming back on. Pleasure. Thanks very much. Thanks for the opportunity. Thanks, Pierre.

Joe Wiesenthal
That was fantastic. Take care, Joe, that was super interesting. I really liked hearing someone's conception of the cocoa market when they haven't necessarily been in it that much and, like, how they formed that thesis and decided to actually put on the trade. Totally. I thought that was fascinating.

I mean, just hearing him walk through all of the different factors, whether it's climate change, whether the two diseases. Fertilizer was one that I hadn't heard that much about before. Totally, but makes total sense, like, when you think about it and when he brings it up, some of the metrics he looks at. I'm also interested in just this point, which is obvious, but I hadn't really thought about it, that you could have a quadrupling in the price of cocoa, and even if that translates into a quadrupling of the price of a cocoa bar or a chocolate bar, that you buy that in a commodity that ultimately is just not that big of a monthly expense or weekly expense for people, you might not get much of a demand response. If you had a quadrupling of the gasoline prices.

You might expect carpooling or people to take less trips or whatever, more subway rides. You're just not going to get that same effect. The market that small. Yeah. And it was kind of interesting to hear a similar dynamic in copper as well.

Tracy Alloway
The one other thing I was thinking about, just to push the inelasticity point a little bit more, I wonder sometimes if all the headlines about cocoa prices going up, if everyone rushes out to buy chocolate in the same way I do, maybe you get even a bit of a demand boost in those scenarios. Or a bullwhip. Right. Because then everyone buys it, and then they're pulling demand from the future. And also, whatever you have in your pantry, Tracy, is probably, you know, it's.

Joe Wiesenthal
It's hidden inventory. Right? Like, the statistical agencies can't see into that. So then there's more. Who knows whether that's an.

But it is a. It is an interesting question. Yeah. No one knows about my strategic chocolate reserve, Tracy. I'd never tell you about the time that I was at the top of the Petronas towers in a nightclub and I talked to a palm oil magnate.

Tracy Alloway
Yes, you have. In Malaysia, right? Yeah, in Malaysia. Yeah. But it was, it's interesting, too, because he was talking about the fact that, like, palm oil is a tree based commodity, obviously, and he was describing very different market dynamics versus a field based crop, in which a field based crop, you just have one person on a tractor, a combine, do the whole field.

Joe Wiesenthal
The labor intensivity, the difficulty of automation when it comes to a tree based commodity versus a field based commodity. There aren't many robots that can climb trees yet, as far as I know. So it's interesting thinking about the market structure of some of these different commodities and how different they are just depending on the growing conditions, how labor intensive, how prone they are to automation, scale, et cetera, things like that. We should have asked Pierre about palm oil. We'll have to have them back for that.

Tracy Alloway
Yeah. All right. Shall we leave it there? Let's leave it there. This has been another episode of the Odd Lots podcast.

I'm Tracy Alloway. You can follow me. Racialoway. And I'm Jill Wiesenthal. You can follow me at the stalwart.

Joe Wiesenthal
Follow our guest, Pierre Ondurand. He's ondurand. Pierre. Follow our producers, Kerman Rodriguez, Herman Ehrman, Dashiellbennet at Dashbot and calebrooksailbrooks. Thank you to our producer, Moses Ondam.

For more adlouts content, go to bloomberg.com avlots, where we have transcripts, a blog, and a newsletter, and you can chat about all of these topics 24/7 in the discord with fellow listeners. Discord gG oddlot and if you enjoy. Oddlots, if you like it when we do deep dives into the price of cocoa and the way the market works, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad free. All you need to do is find the Blue Bloomberg channel on Apple Podcasts and it will allow you to connect your Bloomberg account with the platform and you'll get to listen to us without ads.

Tracy Alloway
Thanks for listening.

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Pierre Andurand Says the World Could Run Out of Cocoa Inventories

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1: Introduction

2: Analysis of Cocoa Market

3: Implications and Forecasts

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